The fiscal cliff just got steeper

Obama's re-election portends a big fight over the national debt and lots of volatility in financial markets.

By MSNMoney partner Nov 7, 2012 10:31AM

US NewsBy Rick Newman

There's less uncertainty on the political landscape. But there's now more to worry about.


For a short while, Wall Street seemed to be fantasizing about a strong Republican showing in the 2012 elections, which would have brought single-party control to a notoriously fractious and dysfunctional government in Washington, D.C. That's one explanation for why the stock market had a banner day as voters were heading to the polls, rising by nearly 1 percent on a day when there was little tangible news to justify the gain.


But after a seemingly endless campaign and $6 billion worth of political spending, Americans voted to reelect President Obama, keep Congress more or less the way it's been, and continue the divided government that's been in place for the last two years. Many analysts considered that a worst-cast scenario in terms of resolving the "fiscal cliff," the huge set of tax hikes and spending cuts set to go into effect in 2013 if Washington doesn't come up with a better plan.


Since averting the cliff would require some kind of compromise between Democrats who control the White House and Senate, and Republicans who control the House of Representatives, a continuation of the status quo suggests that the same spiteful partisan squabbling that already dominates Washington will suffuse negotiations over cutting the deficit and starting to pay down the $16 trillion national debt.


"A status quo outcome will be viewed as a disappointment, and markets may sell off somewhat in the short run," wrote David Joy, chief market strategist for Ameriprise Financial, in a brief analysis of the election's consequences. "It will be viewed as an outcome which offers the prospect for continued partisan bickering on a budget deal, and which increases the likelihood of brinksmanship on the fiscal cliff."


Many analysts assumed that a Republican sweep, including control of both houses of Congress, would have raised the likelihood of a deal to rescind most or all of the tax increases scheduled to go into effect in 2013—which amount to about $545 billion. But Obama wants to raise taxes on the wealthy, which Republicans have said they won't tolerate.


That portends a nasty standoff similar to the meltdown that occurred when the U.S. borrowing limit needed to be raised in the summer of 2011, and bitter partisan wrangling went till the very last second. The borrowing limit did get raised, but the needless 11th-hour drama—plus the collapse of a broader deal to corral the mushrooming national debt—led to the first-ever downgrade in the U.S. credit rating. Over the next month, the stock market fell by seven percent.


So it's little wonder that Wall Street expects more of the same when an even bigger set of deadlines hits at the end of the year. "In a scenario in which the political makeup inside the beltway is largely unchanged from last summer, we expect an intense battle," investment bank UBS advised clients in a research note ahead of the election.


There are still plenty of ways that a divided Washington could steer clear of the cliff and spare the economy another unneeded shock. President Obama, who hasn't staked out a strong stance on deficit reduction, could grant House Republicans a few of their priorities—which mostly involve spending cuts—in order to reach a compromise. Chastened Republicans might show a stronger inclination to solve problems rather than scoring political points. Business leaders, who have been heavily lobbying for a solution, might finally bang some sense into the politicians.


But none of that will happen for a while, if it happens at all. In the meantime, brace for a few weeks that may be the bumpiest of the year so far. The election is over, but the fighting probably isn't.

More from U.S. News

Nov 7, 2012 4:44PM

You fools you votes for a free handout, but that free handout will come to an end soon when your country fall down the cliff. The only ones who will suffer are you the ones who don't know how to work for what they have not the ones who are paying for it.


When the government can't give and give free handout because 75% of the country is out of work and can't pay any more taxes

Nov 7, 2012 4:41PM
I can't believe that we have so many lazy and unpatriotic people in this country. There are so many idiots that voted for Obama just so that they can continue sponging off our government. Why don't these people care about what just happened in Libya? It is not a proud day to call yourself an American. The United States is on a decline, hopefully it doesn't get too much worse, and in four years we can get the support to elect a REAL President that actually cares about our country.
Nov 7, 2012 4:41PM

Couldn't that six billion dollars have been spent better for our country than throwing the greatest percentage of that money into lying ads and television time?


Nov 7, 2012 4:33PM
If the Republicans want to assure that they will not be elected in 2016 then they can continue to be uncompromising.  But if they can look beyond the end of their nose, they will realize it is to their advantage to cooperate. The American people have said they do not want more infighting.  I would advise them to pay attention unless they enjoy shooting themselves in the foot.  I, for one, am sick of this kind of government.
Nov 7, 2012 4:29PM
so you're saying the election of "Mitt for brains"  would have helped ?
Nov 7, 2012 4:29PM

Well one flip side..... JUST MAYBE MY (WHITE) WIFE who actually HAS NEED for disability due to degenerative disk, spinal arthritis, sciatica, bulging disks, etc., maybe she will actually get what she needs.


ONE CAN ONLY HOPE with the millions of lazy good for nothing WELFARE RIDERS who have really no need for it as they are ABLE BODIED.


No this isn't meant as bigoted, quite the contrary, it's the system that is bigoted. We have fought for this and have been denied time and time again.... while some of those she has worked with who are of different racial persuasions slip in with NO. PHYSICAL. ISSUES.


What a joke. And people say ole YT is a bigot.

Nov 7, 2012 4:19PM

CBO projects a minor recession during the first half of 2013 if we go over the cliff (which cuts the budget deficit in half).  However, it estimates we'll have higher growth in the long-run with lower deficits and debt.  So S-T yes its a problem, long-term it isn't.


Going entirely over the cliff puts revenue and spending back towards historical averages...nothing to see here, move along.

Nov 7, 2012 4:17PM
All i can say is.... lady liberty and uncle sam fell to their knees and wept bitterly for the fate of the USA. 4 more years of this financial tyrant will be the undoing of our great nation.... America.... you have voted for your demise... best of luck, it's all you have now... stock up on firearms and ammunition before it's too late or too costly OR ILLEGAL to do so.... today feels very heavy.... it feels as if a countdown to chaos started somewhere. Mark my words....
Nov 7, 2012 4:14PM

Well Obama fans, hope you are happy today. If you had taken the time to listen all these months and millions of dollars ago you would have known that your freedom died yesterday.


In just the Obamacare plan, the supplemental health policies are going to go away for anyone on Medicare. Take the time to do a search in your area for a doctor who acceps Medicare. You won't find any. So when anyone on Medicare needs their medicine refilled just how do you think they are going to be able to get their prescriptions filled without a doctor to write the prescription.


Think oh well you can just go to a clinic. Wrong - if you have an income over $1000 a month cant go to the free clinics.


Come January let me know how much your health insurance premiums jump. Why, because he has just opened the door for free reign and believe me when I say they will blame it on implementing Obamacare.


All you people that think that people with pre existing conditions can now get coverage. They always could for a price. Didn't hear the rest of the story? Google expectations of the premiums for people with pre existing conditions.


Have you people read the plan. Well I have page by page. Think you made an informed choice - read the plan. Think you will be unpleasantly surprised.


Take a close up look at his wedding band. Do a search on Muslim rings. Surprise.


Google or do a search on what Mr. Obama wrote his college papers on. Try and figure out how he got a scholorship to go to Harvard with aid for foreign students.


Unemployment is at an all time high, so is the suicide rate. That isn't making headlines.


Where was Mr. Obama at when the prime minister of Isral attempted to meet with him, not once but twice. One of our greatest allies. He cant seem to find time to meet with him?


How many illegals are we giving college funds to now - the children of illegals, one of his promises to help ensure the hispanic voters. Can't help the elderly, disabled, or the vets, but by all means lets provide the illegals of this country whatever they need;


There are many other things such as letting our Ambasssor die in the September 11th attack.


You might not agree with anything I am saying but if you had not blindly elected this leader and taken the time to do your research you wont be able to deny that everything I have listed is the truth.


There are none so blind as the stupid.

Nov 7, 2012 4:13PM
Thomas Jefferson predicted that this nation would cease to exist when the people realized that they could vote themselves a pension.
Nov 7, 2012 4:13PM
Already moved out as the U.S. has been in decline for four years, and will continue. People will keep their money in a sock rather invest in U.S. businesses, with so many anti-business people as proven by their votes. No reason to believe in the nation anymore.
Nov 7, 2012 4:07PM
I surmise that Axelrod and Obama calculated that if they bailed out the auto industry they would win this election- so basically he won with your taxpayer money- and by increasing welfare thus garnering more votes- Land of the free-bies-
Nov 7, 2012 4:07PM
I note how this story got pulled.  WHY????  just because people are realizing what a HORRENDOUS mistake they made....AGAIN!!!  
Nov 7, 2012 4:06PM
The thing you have to understand about the Bammiephage "mentality" is that they think all those icky-bad things will ONLY happen to people who don't love and worship The Great God of Treason and Hate. They don't understand or accept that those icky-bad things will happen to them, as well. They're in for a big (expletive deleted) shock.
Nov 7, 2012 4:02PM
How can you consider yourself intelligent people.  One man does not make this country successful nor bring it to it's knees.  Greed is the problem.  This country needs to take care of itself and it's citizens.  To do this we all need to pay taxes, and yes some of us with more more to lose should pay more in taxes to have it protected.  We all fund the military through the taxes we pay, but the rich are the only ones who benefit from our military actions and spending.  Wake TFU.  Our military machine has not fought for our freedom since WW2.  Every conflict since then has been about protecting the assets of American business abroad.  Manipulating the Middle East to keep oil prices stable.  Hundreds of thousands of people have died in this world due to conflicts begun or carried on through US involvement.  

We also need to educate the youth of this country at any cost. We can't sit and take the stance that their parents should be responsible to pay for it when they obviously do not have the resources.  We need to break the cycle of poverty through an educated work force that can gain meaningful employment and pay taxes.  That's how you build a base.  You don't sit back and let another generation fall by the wayside, because your grandchildren will end up supporting them.  Man up, Pay up, because the saying is UNITED WE STAND, DIVIDED WE FALL.   
Nov 7, 2012 3:58PM
It's too bad that the Republicans control the House. Now that blaming Bush won't be an option J.B. will be the reason (excuse) that nothing gets done. Maybe Republicans should just vote yes on everything  that gets introduced. Let the Dems have it thier way across the board and see how that works for them. We're all pretty much doomed now anyway. Well, sorry for bringing everyone down. This middle aged, middle class white man has to get back to work. Try to have a good day.
Nov 7, 2012 3:54PM
I have lived for 66 years and never in my life have I ever seen a President who has done so much to ruin the United States of America.  If he thinks anyone in their mind is going to start a small business, he is nuts.  Banks are not going to loan money and big business will not increase anything.  Hospitals are going to go out of business and many doctors are going to retire rather than fight obamacare.  I have three sone and 8 grand kids that are going to suffer very much in the coming years.  It is so sad!!  November 6, 2012 was a very bad day in our history..
Nov 7, 2012 3:53PM
This is just ridulous. The country just spoke very loudly and very clearly to the GOP congress. Stop being an obstructionist party and get on with governing the country.
Nov 7, 2012 3:52PM

Put your seat belt on this is going to be quite the ride.I have lost hope in people in America. If congress has a 8 percent approval then why in the hell do they vote all of the a$$holes back in. OMG America you proved it your dumber than a box of rocks. I do hope you get what you voted for 4 more years of nobody driving this bus. NOBODY !!  OFF THE CLIFF WE GO. 4 more years of Obama just watch your health care costs go everything go up also. 40 percent of  grads work for other feilds then they where trained. I think i'll go sip a cool drink somewhere else for 4 years. Remember there are 1.7 million ****s looking for your job thanks to our   Obama. Way to sell us out for votes you A$$WIPE Goodby America See ya in 4 years Good luck you will need it !!! .Please remember DIVIDED WE FALL !!! Thats how he won . He's going to do less then he did the first 4 years. Remember the russian statement. I'll deal better after the election. OK he told you he was dishonest now I'm going to laugh like hell from my lawn chair on a sandy beach way down south as he ( Obama ) breaks it off in your a$$es

Nov 7, 2012 3:52PM
Economic redistribution (suppression of capital) and when that fails to make everyone happy, political suppression.  The way of tyrants everywhere.  Coming to America soon.
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